Heading Into Earnings, the Glass Is Half-Full for 3M Stock

After delivering for shareholders in both 2016 and 2017, 3M (NYSE:MMM) stock went into the tank in 2018. Last year, 3M stock tumbled almost 17%, including its dividend payout. 

Big-Moat, Low-Growth 3M Stock Is Stuck in Neutral

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Investors started to wonder if 3M was going to be broken up into smaller, more manageable pieces like General Electric (NYSE:GE) and multiple other industrial conglomerates.

Wisely, 3M stayed the course, opting to retain all of its divisions.

As the company prepares to report its first-quarter earnings tomorrow before the markets open, here’s why owners of 3M stock shouldn’t worry, regardless of what the results reveal.

What’s Expected

I’m only going to summarize the expectations for 3M’s earnings because I’m more interested in conveying why the glass is more than half-full for 3M stock in 2019 and beyond.

According to Yahoo Finance, analysts on average expect the company’s earnings to come in at $2.49 per share  of MMM stock, and the consensus outlook for the top line is $8.02 billion. If the consensus estimates prove to be correct,  its EPS will be flat year-over-year, and its revenue will have fallen 3.1% YoY.

While that’s not very inspiring growth, the company is expected to generate more than $33 billion of revenue and more than $10 per share of profit.

Analysts Are on the Fence on 3M Stock

Analysts are on the fence when it comes to 3M stock.

Four have a “strong buy” rating on MMM stock, three have a “buy,” seven have a “hold” rating, and four analysts have “underperform” or “sell” ratings on the shares. So, seven analysts believe 3M stock is a buy, and four believe 3M is a sell, while the other seven can’t make up their minds.

However, analysts on average expect the company’s top line to increase 7.9% in 2020. That’s 1.31 percentage points higher than the company’s average growth rate over the last five years of 6.6%.

One more point: When the company last reported its earnings in January, it beat analysts’ consensus estimate for both revenues and earnings, the only quarter in 2018 in which it it managed to do so. As a result, I think that 3M could beat expectations again tomorrow.

But if it doesn’t, I wouldn’t worry about it. Here’s why.

A Unique Conglomerate

Most of the big conglomerates that are breaking themselves up into smaller pieces have done so because their individual businesses are more valuable on their own than as part of a larger company. 

However, 3M uses its conglomerate structure to share technology, innovation, and research and development. As a result, its large size makes it more valuable because it’s able to distribute its resources across its various businesses, enabling it to develop new products.

The Wall Street Journal’s Austen Hufford recently highlighted the company’s uniqueness.

Most of 3M’s facilities couldn’t be sold as stand-alone operations because they make such an eclectic set of products,” 3M said in its latest annual report, according to Hufford. “One Hutchinson, Minn., plant makes products for more than half of 3M’s 23 divisions,” he noted. 

All of 3M’s divisions are very inter-related, which means any CEO who takes the helm at 3M would have a heck of a time selling off the various units. Perhaps that’s why the largest divestiture in the company’s history was the June 2018 sale of a business that makes copper and fiber wires for the telecom industry. It was sold for just $772 million. That’s not a lot for a company with a $126 billion market cap.

So, if you’re buying MMM stock in hopes that the company will be broken up, you might want to look elsewhere.

The Bottom Line on 3M Stock

Over the next five years, 3M will spend an average of almost $2 billion annually, or 6% of its  sales, on research and development while also investing 5.5% of its annual revenue in capital projects. 

Both numbers are higher than what it’s allocated over the past five years, showing that it continues to be committed to  producing things rather than using financial engineering to make a buck.

Whatever happens Thursday, I know one thing for sure.

3M is a stock to buy and hold forever. Go against the grain, and you’ll win over the long term.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/04/heading-into-earnings-the-glass-is-half-full-for-3m-stock/.

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